Hard-pressed companies, stuck in office deals they can’t get out of, are going to the wall unnecessarily, a corporate recovery expert has warned.
John Kelly, regional managing partner at the Birmingham office of Begbies Traynor, said landlords needed to take a far more flexible and pragmatic approach … or risk seeing properties left vacant.
Mr Kelly said: “Changing market conditions mean firms, particularly professional firms, sometimes need to move.
“In the good times, looking to impress potential clients, they have taken on plush offices in prominent locations but now find they are struggling to service their overheads and the place is simply too big for them.
“It is a real problem.”
Mr Kelly cautioned that the legal sector was particularly vulnerable with the arrival of the so-called ‘Tesco Law’, de-regulation which will allow the likes of supermarkets, venture capitalists and insurance groups to start providing services once the preserve of solicitors.
High Street-based law practices would appear most threatened with small and medium sized generalists especially at risk.
“One way or another de-regulation will affect all sectors from the Magic Circle downwards and all need to respond. The powerful, the niche and the specialist are in a good position to survive, but pundits reckon many ‘ordinary’ law firms are likely to be forced out.
“This is why we are already seeing so many mergers and restructurings in the sector.
“But they need to act fast and if, for example, they are constrained in any way, maybe a costly office they can no longer afford, then they are in great danger of collapse. The best known victim to date has been Manchester firm Halliwells. Others will be anxious not to go the same way.”
Mr Kelly said landlords typically demanded 10-15 year leases from professional firms, whereas five to ten year leases with a break clause in the middle might be far more sensible.
And, with so much vacant space across Birmingham, landlords who failed to negotiate could find themselves stuck having to pay rates on an empty property – caught by the Government’s controversial void rates regulations.
“Landlords need to choose whether to be more reasonable or accept long term voids. It is a difficult market for landlords and if they refuse to be accommodating, resulting in the tenant going down, then it is all rather self-defeating. Far better to be understanding, and try to meet the customer’s needs. Better to have some money coming in, even if it means negotiating a deal, rather than none at all.”
He went on: “When we are called in to advise firms in financial trouble often much can be done to help them.
“But property can be the critical issue which, if unresolved, means there is no way of keeping the business solvent.
“It can be a millstone around their necks. You reach a point where turnover levels are no longer sufficient to meet the overheads. This is where an onerous lease and a stubborn landlord can break the camel’s back.”
Mr Kelly urged the Government to look into the issue and, if necessary, legislate on property contract reform.
He said: “I accept this is a difficult area but it is frustrating to see firms which could survive fail to do so purely because their circumstances have changed and they can no longer meet property commitments which may have been negotiated under completely different market conditions.
“Given the tight economic reality, which many commentators believe will likely stay with us for years, this matter needs addressing before it gets completely out of hand.”